How to Keep My Cryptocurrency Safely, Securely and Conveniently: Choosing the Right Storage Method for You
You just spent money for your cryptocurrency — now, how do you ensure that it is kept securely? The main feature of cryptocurrency is its virtuality, which means that you don’t keep it in a vault, a bank or under your bed. Two important things:
- The amount of cryptocurrencies you own is recorded on the blockchain.
- To access the cryptocurrencies you own, you need a private key. Ie. storing your cryptocurrencies means storing your private key.
Now, how are private keys related to Cryptocurrency Storage Methods?
- Hot Storage refers to private keys that are stored on Internet connected devices (ie. more vulnerable). They are more convenient to use due to ease of access. Do note that once a private key is exposed on the internet, it will not provide the same protection as one that has never been exposed.
- Cold Storage refers to private keys that are not accessible via the internet. They are more secure as the private key exists only on the offline computer where it is generated, and better suited for long-term bitcoin storage.
Types of Wallets
Online Personal Wallet Service
Essentially, you access your wallets online via a username and password.
Personal Hot Wallet
A personal hot wallet is a software program that runs on a device you own. Your private keys are saved on your device and communicates with the network, so you need to be careful about malware and hacking attempts on that device.
Paper Wallets
One of the simplest and as such, most popular cold storage methods — as this essentially means writing down your Bitcoin address and private key (generated on an offline computer) on a piece of paper and not saving that information on the computer itself. However, note that paper wallets are a one-time use only ie. if you want to spend only some of your saved cryptocurrencies and keep the rest in a paper wallet, you should immediately store your remaining cryptocurrencies in a new paper wallet. Make sure to prepare your new paper wallet ahead of time!
Encrypted Paper Wallets
This is an improvement from the paper wallet, where you write down an encrypted version of your private key on the piece of paper, instead of just squarely writing down your private key. You then decrypt your private key with a password you choose.
Offline Transaction Signing
This would be the most basic security method for businesses or users who handle large amounts of cryptocurrencies — essentially two computers are in play here: the offline computer which holds the private key, and the online computer which does not hold the private key but is essentially the personal hot wallet.
Fragmented Private Keys
As the name suggests, this means the private key is divided into many fragments eg. 7 fragments, but any 5 is required to reconstruct the private key. Each fragment on its own is not enough to reveal the private key, which means that even when one fragment is compromised, the other keys which are not compromised are still safe and sufficient to move the cryptocurrencies to another address.
Multi-Signature Addresses
As the name suggests, this means that companies can require for eg. any 2 out of 3 keys to spend the stored cryptocurrencies. This means that any single person is not able to authorize movement of cryptocurrencies without the signature of the others. This is the most secure and responsible way to manage large amounts of cryptocurrencies.
Hardware Wallets
You would already have heard of names such as Trezor and Ledger Nano S — these are small physical devices that act as an offline computer to store your private keys. The reason why it is convenient is because you can plug it into your online computer, and not expose your private key even if you have viruses on your online computer. The downside, however, is that you risk losing your cryptocurrencies when you lose your device if it does not provide ways to back up your crypto currencies. For more information on where to buy your hardware wallets in Singapore — check out our post here.
Brain Wallets
Essentially, this means that you memorize your private key — oe. Creating a memorable passphrase that you commit to memory. The longer and more complex the passphrase, the more secure your cryptocurrencies are. The downside to this is that you must remember it.
No system is 100% foolproof, but we recommend that you start small and use a storage method that is easy for you, before moving on to more secure methods as you start owning a larger amount of cryptocurrencies.
Originally published at learn.eurekapro.com.
